America Online stock, which went public in 1992, made many early investors rich. Shares soared more than 10,000% over the next seven years as the company introduced millions of people to the Internet. But AOL, as it is now known, is unlikely to do the same for current investors. In fact, we think AOL faces a daunting future in its return as an independent company.

With its spinoff from Time Warner completed, the new AOL (symbol AOL) began trading for the first time as an independent entity on December 10. The stock, which had been trading on the New York Stock Exchange on a “when-issued” basis since November, opened at $23.39, then remained fairly flat for the rest of the day. It closed at $23.52 on light volume.

AOL must replace a dying dial-up Internet-access business, which accounts for nearly half its revenues, by drawing bigger crowds to its stable of advertising-supported Web sites. But given intense competition among online media firms and how easy it is for new entrants to compete, we don’t think that will be enough to produce significant returns for shareholders.

As of September 30, 2009, AOL had 5.4 million dial-up customers, down from 6.9 million at the beginning of the year. During those nine months, dial-up revenue was $1.1 billion (out of $2.4 billion in total revenue). That’s down only 28% from the same period a year earlier.

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But merely replacing dial-up revenue with advertising won’t keep the company level. The dial-up business requires little new investment, so the profit margins are higher than in advertising. In addition, dial-up customers are a reliable and critical source of traffic for AOL’s advertisers. As these people migrate to faster Internet service at cable and phone companies, AOL will need to “increase the number and engagement of other consumers on AOL media,” the company says in a regulatory filing. In other words, as millions of people switch to Comcast, Verizon and anyone else, AOL has to find replacements willing to pay for more services.

That won’t happen in the short term. For one thing, advertising revenues are declining as well, down 19% over the first nine months of 2009 . But even if advertising were growing enough to offset declining dial-up revenue, it would still “likely result in declines in operating income and cash flows for the foreseeable future,” the company admits.

Moreover, chief executive Tim Armstrong, a former advertising chief at Google, is firing one-third of the company to save money while simultaneously trying to beef up media and service offerings. It’s hard to see how AOL can gain a competitive edge while walking that tightrope.

Granted, the company does have more than its famous name. It owns a number of popular entertainment, news and lifestyle Web sites, as well as local entertainment guides and directories and consumer services such as AOL Music, Moviefone and MapQuest. Its e-mail and instant-messaging services are also widely used. But AOL doesn’t dominate any of these areas in the way that Google rules searches (and maps) or Facebook and MySpace reign over the social-networking universe.

AOL does have a few things going for it. As a recognized brand, its sites draw 108 million visitors, fourth-best among U.S. Internet properties, according to research firm comScore Media Metrix.

In addition, AOL has emerged from the Time Warner entanglement—their combination in 2001 is considered one of the most-disastrous mergers ever-- with no debt. And, by reasonable yardsticks, the shares look cheap. Analysts expect AOL to produce operating income of around $1 billion this year. At a price of $23.52, it has a market value of $2.53 billion, or about three times cash flow.

Yahoo and InterActiveCorp, two firms with Internet advertising-based businesses, trade at 13 and ten times cash flow, respectively. On the other hand, dial-up Internet service providers EarthLink and United Online trade at two and four times cash flow, respectively. The right multiple for AOL, with its blend of dial-up and advertising, should probably fall somewhere in between. That would imply the stock can go up as long as AOL’s revenues don’t utterly collapse.

Given widespread skepticism about AOL’s prospects, some early successes as an independent firm might produce short-term trading profits for early investors. But for the long term, it’s hard to justify risking money on a company with shrinking profits, enormously strong competitors, and so many uncertainties in its turnaround plan.

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